Abstract: This paper studies the pricing of a defaultable bond with stochastic recovery under the hybrid model. The pricing model with a negative correlation between the reco-very rate and the default intensity is sestablished by using the Ito's formula and arbitrage-free principle. Then a closed-form solution to the pricing model is obt-ained by applying the variable transformation technique and partial differential equation (PDE) approach, which makes it convenient for portfolio management and hedging. Finally, numerical experiments are provided to illustrate the impact of recovery parameters and intensity parameters on the bond's credit spread. The numerical results show that the credit spread under the stochastic recovery is lower than that of the corresponding fixed recovery, that is, the credit spread under the fixed recovery is overestimated.

Key words: hybrid model, stochastic recovery rate, defaultable bond, PDE approach, pricing